General Motors Company (GM) vs. Ford Motor Company (F) Stock: Which Is the Better Value?

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Donald Trump’s election has put U.S. automakers on notice. Once Trump takes office in January, he’ll quickly go to work dismantling NAFTA, a deal that the president-elect feels has cost Americans millions of jobs.

General Motors Company (GM) vs. Ford Motor Company (F) Stock: Which Is the Better Value?

Both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) stand to lose from any protectionist actions implemented by the new regime, but that didn’t stop investors from pushing both stocks higher after the Nov. 8 surprise election result.

With the average S&P 500 stock trading at 18 times earnings, Ford stock and General Motors stock are ridiculously undervalued despite generating huge gobs of positive cash flow in recent quarters. Both Ford and GM experienced growth in their U.S. car sales in November; it will be interesting to see what happens in December as we close out 2016.

Heading into 2017, investors are trying to figure out who wins the value battle — Ford or General Motors? Here’s my two-cents worth.

Ford (F) Stock Pros

It’s making a lot of money.

In its third-quarter conference call, CEO Mark Fields said about the quarter, “We continue to expect to deliver one of the best profit years ever for the company, and that’s a full year company adjusted pre-tax profit of about $10.2 billion.”

With money to burn, Ford is showing shareholders a lot of love distributing $2.9 billion to them in the first nine months of the year; $2.8 billion in dividends and $100 million in share repurchases.

Ford’s doing well in all regions except South America (everyone’s hurting) and that’s translated into free cash flow for the trailing 12 months of $12.3 billion, or 8% of revenue.

Trading at 7.2 times earnings and 4.2 times free cash flow (23% FCF yield), F stock is definitely available at a record-low valuation not seen since before the auto bailouts.

Ford (F) Stock Cons

It is losing market share in the U.S, its most important market.

With market share down seven-tenths of a percent in Q3 combined with a seasonally adjusted annual rate decrease driven by dwindling retail sales, Ford isn’t doing nearly as well in its home market as it should be.

Although it currently is making significant profits elsewhere, its North American automotive segment saw its Q3 pre-tax profits decline by 57% from last year to $1.3 billion on lower volumes, including a 20% decrease in cars and a 3.4% decrease in SUVs.

Ford management took the position that it was better to lower production in the third quarter than to offer ridiculous incentives like some of its peers. That explains some of the declines. The rest had to do with higher volumes in Q3 2015 from the newly launched Ford F-150 SUV, along with fewer sales from its new 2017 Super Duty pickups as a result of factory downtime.

Overall, Ford believes the retail market, while solid, is softening, leading many to argue that the automotive market’s hit a cyclical top.

General Motors (GM) Stock Pros

GM is gaining market share in the U.S.

In November, GM’s retail market share increased 0.3% to 16.8%, its highest level since 2009 and the 17th month of market share gains out of the past 20. Buick saw U.S. sales increase 22% in November compared to last year, its best November since 2003. Its other nameplates: Chevrolet, GMC, and Cadillac, all had an upbeat November portending good things for 2017.

“We are ahead of plan selling down our 2016 model year inventory and we expect to close out December with more retail share growth,” said Kurt McNeil, GM’s vice president of U.S. sales operations. “GM is heading into 2017 in a position of strength with the planned launch of key new products, like the all-new Chevrolet Equinox, into the heart of the market.”

On the profit front, GM is having a good year.

It expects 2016 full-year earnings per diluted share of at least $5.50 … possibly closer to $6. At the top-end of the range we’re talking about $9.4 billion in adjusted earnings.

General Motors (GM) Stock Cons

Mexico and China could become serious distractions under a Trump administration affecting profits and revenues. GM is the largest car manufacturer in Mexico, producing 838,000 vehicles annually, almost double those produced by Ford. LMC Automotive suggests the macroeconomic effects of revisiting the NAFTA treaty would have ramifications for its growth both in the U.S. and elsewhere leading to lower production numbers in that country.

In China, Trump’s been lobbing hand grenades on the trade front, including the proposal of a 45% tariff on products imported from China.

With the Taiwan diplomatic slight fresh in its mind, it’s possible that it would recommend to its people that they abstain from buying Buicks, a very popular car in China and a big contributor to its $1.4 billion equity profit from the country in the first three-quarters of the year.

A trade war is likely to hurt GM even more than Ford.

Bottom Line

This is a tough one.

But at the end of the day, I see GM taking more progressive steps than Ford toward the future — it loses $9,000 per Chevy Bolt — in an effort to be a global player in the electric car market. Losses today could translate into profits tomorrow.

As this is a value battle and GM stock is cheaper than F stock,  ultimately, I have to declare GM the winner.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/f-gm-ford-stock-value-battle/.

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